TORONTO – Ottawa unveiled a third option for pension plans Thursday, touting it as the best way to secure a retirement for more Canadians rather than move towards expanding the national Canada Pension Plan, as some provinces like Ontario have long wanted.
The federal government said the target-benefit plan, also known as the shared-risk plan, can be a middle ground between defined-benefit plans, generally favoured by workers, and defined-contribution plans, which are favoured by employers.
It’s billing the new framework as a “sustainable and flexible” option, which will only be available for Crown corporations and federally-regulated workers that are generally in the transportation, banking and telecommunications sectors.
“We need to have a third option,” said Kevin Sorenson, minister of state for finance, following a speech at the Economic Club of Canada in Toronto.
“We are not picking and choosing for Canadians. We want the defined-benefit plan there as a choice, we want the defined-contribution plan to be an option and we want the target-benefit plan to be an option.”
Ottawa calls the voluntary plan as an “innovative approach” that will allow employers and employees to create targets, and adjust benefits and contributions to their needs in times of surplus or deficit. This issue was highlighted in the recent financial crisis that put many defined-benefit plans in jeopardy due to investment shortfalls.
The proposed framework would allow companies with defined-benefit and defined-contribution plans to convert to target-benefit plans, if all parties agree. Sorenson added that the flexibility of the third option may prove attractive to employers who are moving away from the risk of defined-benefit plans but still want to offer employees some security.
Public consultations regarding the proposal will be held during the next 60 days.
With more workers retiring in the next few years, and living longer, the drain on pension plans, including the Canadian Pension Plan, has led to concerns that Canadians may be not be adequately prepared financially for retirement.
But Liberal MP John McCallum said that this shared-risk proposal will only apply to a small proportion of workers. There are currently more than 1,200 federally-regulated pension plans in Canada and federally-regulated employees account for about six per cent of all Canadian workers, not including those who work for Crown Corporations.
“It’s absolutely not a substitute to expanding the Canada Pension Plan that would’ve helped all Canadians have a better pension,” said McCallum, the Liberal critic for seniors, citizenship and immigration and multiculturalism.
“This would harm Canadian pensions. It wouldn’t help them.”
He said that companies with defined-benefit plans – in which employers shoulder the majority of the investment risk – would have an incentive to downgrade their employee plans to a shared-risk plan, which comes at a cost to the worker. Whereas employers with defined-contribution plans – in which employees assume the investment risk and rewards – or no plans in place at all, would have little reason to offer a shared-risk plan at a cost to the company.
Yet the Canadian Federation of Independent Business argues that there would be reasons for companies to upgrade their defined-contribution plans if they want better benefits to attract new workers.
CFIB president Dan Kelly said although it would be a step down for employees on a defined-benefit plan, the shared-risk is a better option than the defined-contribution plan, or no plan at all.
The group added that although it supported Ottawa’s move, it hoped that this option will soon be extended to the public service.
“With the private sector moving quickly away from traditional defined benefit pension plans, a shared risk model will be a terrific addition to Canada’s pension landscape,” said Kelly.
“A shared risk plan could also help taxpayers get out from under massive unfunded pension liabilities, such as the $6.5 billion liability at Canada Post alone. We hope the federal government doesn’t stop with Crown Corporations and considers moving the core civil service to a less costly shared risk pension plan.”
Sorenson refused to comment on applying this option in the public sector and said that, for now, the new plan will only be available to Crown Corporations and federally-regulated industries.
Sorenson said Ottawa continues to oppose expanding the Canada Pension Plan by boosting premiums and benefits, an initiative favoured by Ontario, Prince Edward Island, and Manitoba, but one it called “risky” and said would cost jobs and stunt business development by raising premiums for workers and firms.
“We are not looking at the present time enhancing CPP. We have said that now is not the time to talk about extra payroll taxes,” he said.
“We would encourage Ontario to look at balancing their budgets, and move away from higher payroll taxes for people of Ontario. We believe it would put businesses here in Ontario at a disadvantage to other businesses across the country.”
Ontario Finance Minister Charles Sousa said his province plans on moving ahead with its own provincial pension plan, even without the support of the federal government. In the past, Sousa has accused Sorenson of misrepresenting the issue with statements that enhancements to CPP could cost up to 70,000 jobs.
“Talk of a modest enhancement was, however, dismissed by the federal government in December, and today’s announcement gives no sign of a change in direction,” he said in a statement.
“It is as a result of this continued inaction that has forced Ontario to act now, so that today’s workers have a more secure retirement tomorrow. We will continue to move forward to implement a made-in-Ontario alternative to protect Ontario workers in their retirement. Doing nothing is not a solution to this problem.”
The Harper government has long preferred tax-free savings accounts and pooled registered pension plans, both voluntary savings vehicles created by the Conservatives, rather than mandated CPP improvements.
The CPP, established in 1965, currently provides retirement benefits to contributing workers up to a maximum of about $12,500 annually.
Maximum yearly premiums of about $4,700 are split half-and-half with employers; the self-employed pay the full amount.
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